Monday, March 12, 2007

A significant change happening in my thoughts for the past few years is this increase of interest in economics and finance. My dear sister, who happens to be an economist, is damn tired of me asking her all sort of dumb economic questions :) She even wrote a nice post about my new obsession, which - of all things - should be read by Greg Mankiw the economics professor himself! Yikes.

Anyways, I find it amusing that a lot of what matters, we already learned in our early childhood years. I remember how grade school taught me that economics comes from the Greek words "oikos" and "nomos", which means "household" and "science". And when you're running a household, you want your family (meaning everyone in the household) to be wealthy and happy. Thus gaining/creating wealth is as important as making sure that it gets distributed accordingly.

And so I find it interesting how The Economist views globalization (free trade across national borders). In their special report of September 2006, titled The Power of the Emerging World, the magazine pointed out (subscription required) how globalization has increased the total "wealth" created by the whole world: that profit, as percentage of total economic output, is at an all-time high; that globalization has brought better outcome to the world.

But hold on. Who is "the world"? I am reminded of the recent corny Pertamina (Indonesian state-owned oil company) TV ad that says "if you buy Pertamina lubricants, you gain and the nation gains". The question is, "who do you mean by 'the nation'?" It's quite common knowledge that profits of big state-owned companies is kept or even misappropriated by a few people. So does the nation really gain? Theoretically, yes - because Pertamina is a state-owned company. In reality, not if you consider the majority of the people who have very little to gain from it (if at all).

Which brings back to the question of globalization. OK, so globalization has brought more profit at the world scale over time. And if you divide this increasing profit by the number of the population, it seems that the world is getting better off, on average. But that's not how profit is distributed. You don't just give it out evenly to everybody. What's happening now is that although the cake is getting bigger, more and more of it is being eaten by less and less people. The Economist admitted that

workers' share of the cake in rich countries is now the smallest it has been for at least three decades (see chart 5). In many countries average real wages are flat or even falling.…

In other words, we have increasing inequality, and this this can be better seen through the median, or the Gini Coefficient.

It's funny how economists are taught all these quantitative tools, but when it comes to free trade, they seem to only use the average. Thus I am reminded of a quote from my sister's professor: "Ideologies are for people who are too lazy to think."

So far we've just been talking about the paradox behind the internal workings of economics when applied to free trade. What about the impact of free trade on the environment and on communities? What about leisure time, unpaid housework, family breakdown, increase of crime? What about ecological footprints? Are they reflected in the GDP? Economists have often dismissed these as "externalities." But if we're trying to view/study economics in all its completeness and in real world application, these should be seriously factored in.

Alright, I'll stop here. I'm not even an economist. But I am thrilled that Adbusters is co-leading the campaign to demand better economics education, based on a more realistic science. They call it "True Cost Economics":

This is our most urgent campaign: a fight to revolutionize economics before our planet is destroyed. We need a new economic paradigm - one that is open, holistic, and human scale [...] The economic revolution begins with jamming Economics departments. It ends with an entirely new way to measure progress.

[E.F. Schumacher] coined the term “Buddhist economics” to describe the opposite of the Western economic model, one that didn’t allow for unlimited growth and consumption and emphasized renewable resources. For those who questioned what Buddhism had to do with economics, Schumacher replied, “Economics without Buddhism, i.e., without spiritual, human and ecological values, is like sex without love.”

Don't get me wrong. I think economics is important, and livelihood (earning money) is a big factor of what makes the world tick. However, isn't it time that economics be freed from economists who are blinded by their own ideology, be it left or right?

6 comments:

Muli, economists do not dismiss "externalities". The term "externalities" has no dismissive or residual connotation to it. Indeed externalities have been a topic of interest of many great minds in economics. Coase Theorem is but one example of things economists have to say about externalities.

I also don't know what to make of your statement that "economists only use the average". The statement is so false I don't know where to start :-(

"workers' share of the cake in rich countries is now the smallest it has been for at least three decades (see chart 5). In many countries average real wages are flat or even falling.…"

that's true, BUT (and it's a VERY BIG BUT!!) Western workers are only getting less of the cake, because developing country worker's are getting MORE!! moreover Western workers generally are much increasingly better off now because of free trade - they can purchase cheaper goods.

Inequality worldwide is DECREASING, due to globalisation. That is the key fact.

"economists have not included enough of externalities in many economic models, most notably the important GDP."

Economists think about externalities all the time, if fact externalities employ more economists than anything else!!

(It's politicians and businessmen that like to ignore externalities!)

i think you've brought up a good important debate, although I think your logic is fundamentally flawed.

John,Thanks for your comments. I realize now this is a sensitive topic, and I may have put in less care than I should in writing the second part of the post (referring to true cost economics).

However, let me reply to some of the points you raised:

"... Western workers are only getting less of the cake, because developing country worker's are getting MORE!!"--> So are you saying that the dependency theory is true? :)

"moreover Western workers generally are much increasingly better off now because of free trade - they can purchase cheaper goods."--> Isn't the first part of this sentence contradictory to your previous sentence? This is how I see it: now that they can have an option to buy cheaper goods, they can afford to have their wages cut. The question is: is the quality of this cheaper good similar or superior to the one they are used to buying before their wage got cut?

"Inequality worldwide is DECREASING, due to globalisation." --> Yes, if we looking at a country to country analysis. But what about region to region? Or person to person? Or between employees and owners?

All in all, I see that globalization has both positive and negative effects. Even a magazine as neoliberal as The Economist admits this. And no one at this point has the magic formula on how we can just reap the benefits and eliminate the losses.

And anyone stuck in their own mindsets/ideologies, people who think "either or" or those who say "this is always/100% good, and that is always/100% bad" are not helping the debate.

I've never heard of that "theory" before. I don't believe rich nations exploit poor nations more or less than poor nations exploit poor nations.

"--> Isn't the first part of this sentence contradictory to your previous sentence?"

No, it's just that Western worker's wages don't grow quite as much as workers in China or capitalists -- but /everyone/ is getting better off.

"This is how I see it: now that they can have an option to buy cheaper goods, they can afford to have their wages cut. The question is: is the quality of this cheaper good similar or superior to the one they are used to buying before their wage got cut?"

That's a wrong-headed simplistic way of thinking about it. Westerner's wages aren't getting smaller, and good are getting cheaper.

"--> Yes, if we looking at a country to country analysis. But what about region to region? Or person to person? Or between employees and owners?"

Well, if you would prefer less inequality between Western employees and employers, then you will also have an even poorer Indonesia for example. I know what I would prefer.

"All in all, I see that globalization has both positive and negative effects."

I honestly haven't seen or heard of any negative effects of globalisation. Free markets and free trade just helps people cooperate better together.

Imagine if Java taxed good coming in from Sumatrans and Sumatrans needed visa to work in Java etc. etc. - do you think there would be /any/ positive effects??

John, really, u've never seen any negative effects of globalization/free trade in any part of the world whatsoever? My guess is that you must then be lucky to live in places where governments can manage the 'adjustment' process,otherwise I find this very hard to believe. I've never come accross trade literature that doesn't recognize that trade has strong effects on income distribution within countries.